Iowa Speedway
In order to calculate the depreciation period, economic life should be taken into consideration.
Grandstand is mainly made up of structures (Steel & Concrete) having physical life of more than 60 years. Depreciation period will be governed by economic life however the maximum limit will be the physical life.
In order to consider the economic life, these are the following two points taken into consideration -
The seating capacity for Iowa speedway is 25,000 people. Due to competition in holding races, there is a possibility that after 15 years, the stadium may not be a suitable venue for holding NASCAR races
Although, the physical life of Grandstand is quite long but I believe that the technology may become obsolete in 15 years. People would like to see faster races and that will lead to lower filling of total seat capacity.
Cost of Assets: 70 million
Land: 1million
Track: 6 million (Life of Track 7 Years)
Grandstand: 63 million
Debt/ Equity = 1:1
Debt: 35 million
Equity: 35 million (Assumption on return: 3%)
Calculation:
Total cost of debt: 35 million at 3% for 10 years:
Total principal & interest is 47.04million
EMI (Yearly) = 47.04/10 = 4.7 million
Total Sales: 20million
Sale from Ticket: 7 million
Event Related Fee: 6million
Corporate Sponsors: 6 million
Luxury Suites: 1 million
Operating Expenses: 15 million (expected)
EBIT: 5 million
Earning Before tax: (5million – 4.7million) = 0.3 million
Net income (assuming 40% tax) = 0.18million
Profit Margin (Net Income/ Sales) = 0.9%
With Operating expensed of 15 milion , profit margin of 0.9% is very low. It’s doesn’t seems very lucrative to the investors. Therefore, in order to it to more profitable, the operating expense can be reduced from 15 million (expected) to an amount wherein profit margin can be increased to a respectable figure. This is not turn away the investors.
Grandstand is mainly made up of structures (Steel & Concrete) having physical life of more than 60 years. Depreciation period will be governed by economic life however the maximum limit will be the physical life.
In order to consider the economic life, these are the following two points taken into consideration -
The seating capacity for Iowa speedway is 25,000 people. Due to competition in holding races, there is a possibility that after 15 years, the stadium may not be a suitable venue for holding NASCAR races
Although, the physical life of Grandstand is quite long but I believe that the technology may become obsolete in 15 years. People would like to see faster races and that will lead to lower filling of total seat capacity.
Cost of Assets: 70 million
Land: 1million
Track: 6 million (Life of Track 7 Years)
Grandstand: 63 million
Debt/ Equity = 1:1
Debt: 35 million
Equity: 35 million (Assumption on return: 3%)
Calculation:
Total cost of debt: 35 million at 3% for 10 years:
Total principal & interest is 47.04million
EMI (Yearly) = 47.04/10 = 4.7 million
Total Sales: 20million
Sale from Ticket: 7 million
Event Related Fee: 6million
Corporate Sponsors: 6 million
Luxury Suites: 1 million
Operating Expenses: 15 million (expected)
EBIT: 5 million
Earning Before tax: (5million – 4.7million) = 0.3 million
Net income (assuming 40% tax) = 0.18million
Profit Margin (Net Income/ Sales) = 0.9%
With Operating expensed of 15 milion , profit margin of 0.9% is very low. It’s doesn’t seems very lucrative to the investors. Therefore, in order to it to more profitable, the operating expense can be reduced from 15 million (expected) to an amount wherein profit margin can be increased to a respectable figure. This is not turn away the investors.